The main evidence that I cite against the AD/AS story is the length of
unemployment spells and the large number of workers who are not going
to return to jobs in their previous industry, much less their previous
employer. At some point, even the 99 weeks of unemployment benefits is
not sufficient to explain long-term (approaching permanent)
unemployment.

If Arnold wants skeptics (like me) to take PSST seriously, he's going to have to try a lot harder. As a skeptic, I immediately wonder:

1. Why can't AD/AS explain long unemployment spells? This fits perfectly with an Akerlof-Dickens-Perry story where a long-run inflation/unemployment trade-off emerges at low inflation rates.

2. Why can't AD/AS explain industry shifts? There are always struggling industries. During a recession, you'd expect whatever industries were struggling during the boom to suffer even more. What theory doesn't predict this?

3. Why can't 99 weeks of unemployment benefits aggravate nominal rigidities enough to explain the slow recovery? Free money doesn't just hurt the incentives of the unemployed to search for/settle for a new job. It also hurts the incentives of employers to cut wages of existing employees.

5. Perhaps most importantly, skeptics want careful quantitative comparisons between (a) past recessions and today's, and (b) quick-to-recover economies and ours. How do the length of spells and industry shifts today compare to those of the Reagan recession? The Great Depression? Why would entrepreneurial adaptation to technological innovation be so much smoother in e.g. Sweden and Australia than the U.S.?

A solid "Guide to Discontinuity/ZMP for Skeptics" would anticipate and answer all of these questions - and many more. With all due respect to Arnold, I don't see that he's even trying to do this.

I often take contrarian positions. Emotionally, I'm on Arnold's side here. But when you play the contrarian, you can't expect skeptics to do your legwork for you.

I’m puzzled by Bryan Caplan’s hostility (1, 2, 3) to the ZMP hypothesis. It is hard to think of another idea that is more Caplanian. This is after all the man who pointed out that “the lower deciles don’t contribute that much to... [Tracked on November 16, 2011 2:52 PM]

For one, I think you are vastly understating how much established evidence there is for ZMP-like ideas; start with the literature on labor hoarding, and discussions of the sudden switch to countercyclical labor productivity. Measures of the impact of unemployment insurance so far are not coming out very large. No one need deny that AD has a big role.

A deep point: market equilibration of the macroeconomy is SLOW. There are a lot of moving parts, a lot of things to figure out. Lots of employees are ZMP for the first few days or weeks, and then there were the costs of designing a job. It might take quite a while for a new hire to pay off. If rapid technological change and political risk make you uncertain how you'll be doing business in five years' time, the new hire may not be worth it. Also, foolproof jobs tend to be the ones that get automated, while jobs that require judgment, character, initiative etc. are jobs for somebody you know and/or somebody with a relevant track record. Technological employment is occurring all bunched up because the Fed and the government sheltered us from it with low interest rates and deficit spending as long as they could. They're still trying to, but it doesn't work anymore.

Of course equilibration is slow. The New Keynesians have all sorts of hypotheses for why it is slow: efficiency wages, menu costs and monopolistic competition, worker morale, semi-stable sunspots, etc. And their mechanisms imply such and such effects of monetary or fiscal policy.

Kling has search for PSST for the mechanism, briefly, that search for long-term profitability just takes lots of time and no other short-term non-market-clearing equilibrium is 'sustainable'. Fine. Great. Ignore the truly weird general equilibrium dynamics required by this for the moment. So why is expenditure on said search procyclical rather than anticyclical? There's a simple correlation problem here, same as that which bites a lot of RBC theories. Bunched-up technological unemployment would imply anticyclical investment in new technologies. Instead it is procyclical. So...?

Or, as Bryan points out, why would finding new PSST be coincidentally faster in countries with better monetary policy if it is fundamentally a real process?

ASAD: A SAD DEVELOPMENT IN MACROECONOMIC PEDAGOGY
Roger W. Garrison, Auburn University

“The most fundamental case against presenting macroeconomics in an ASAD framework is that the framework itself involves some major (and many minor) misrepresentations and inconsistencies. The least of these problems is the fact that AS is not a supply curve and AD is not a demand curve…. At best, both curves are market equilibrium curves, each deriving from considerations of both supply and demand.

“More damaging to the ASAD framework is the fact that the separate sets of assumptions that underlie these two market equilibrium curves are mutually contradictory. Why, for that matter, are there two market equilibrium curves? The answer to this question is that the two curves reflect two different (and conflicting) views about just how the economy works. This is the internal conflict identified by David Colander in "The Stories We Tell: A Reconsideration of AS/AD Analysis (Journal of Economic Perspectives, Summer 1995). The AD curve is based upon a Keynesian view of supply (Demand creates its own supply); the AS curve is based upon a classical view of supply (Scarcity is a binding constraint). While each of these views has its own merits and application, the representation of the two views as two (somehow interacting) curves on the same set of axes is neither theoretically nor pedagogically sound.”

In asking what PSST can tell us that AS/AD can't, Bryan seems to be assuming that AS/AD makes sense. But if AD/AS never made much sense to begin with, AD/AS with bells and whistles is an easy rival to beat.

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